U.S. PIPELINES REPORT MIXED RESULTS FOR 1993

Warren R. True
Pipeline/Gas Processing Editor

U.S. natural gas pipelines started 1994 in generally better condition than a year earlier. These companies' operational and financial results for 1993 indicate modest but continuing improvement.

Petroleum liquids pipelines, on the other hand, suffered reduced revenues and incomes last year: increased deliveries and truckline movement of liquid petroleum products failed fully to offset fewer barrels of crude oil moving through the companies' pipeline systems.

Overall, these federally regulated interstate pipelines used fewer miles of line in 1993, the most recent year for which data are available. Those companies classified by the Federal Energy Regulatory Commission (FERC) as major natural-gas pipelines, however, increased mileage in 1993.

And despite an overall decline in operating revenues for all natural-gas pipelines, those same majors increased both revenues and net incomes for 1993.

Table 1 and Fig. 1 provide an historical view of revenues and incomes for the body of all pipelines reporting annually to the FERC.

Revenues, incomes, mileage operated, and other data are tracked in Oil & Gas Journal's exclusive Pipeline Economics Report.

Natural-gas pipelines also plan to build fewer miles of pipeline in the near future.

This is indicated in the construction-permit applications filed with the FERC in the 12-months preceding July 1, 1994, and also tracked in this OGJ special report.

Additionally, this report contains extensive data on actual costs of pipeline construction compared with what companies expected to spend at the time of projects' approvals.

SHIFT CONTINUES

Interstate natural-gas pipelines continued to move away from their former roles as merchants of natural gas to their newer roles as transporters. (See also, OGJ, Oct. 31, p. 29.)

Volumes of gas bought, moved, and resold by all gas pipelines declined again in 1993, by more than 24% compared with sales for 1992, after a similar decline in 1992 over 1991.

Sales in 1991 compared to those for 1990 dropped by 9%; and by 20% in 1990 compared to 1989.

Gas volumes transported for others by major gas pipelines increased by almost 7% over comparable volumes in 1992.

The increase was much lower when all other gas pipelines are rolled into the equation.

But it's the majors A,ho have been most affected by the industry's restructuring over the past 10 years. What was begun in 1984 with FERC Order 436 has been accelerated by Order 636 that was issued more than 2 years ago.

In 1992, major gas pipelines increased their volumes moved for a fee by more than 4% over those moved in 1991.

In 1987, the first year for which OGJ began tracking gas volumes moved for a fee on U.S. pipeline systems, the total was 13.5 tcf for all companies, 12.9 tcf for majors. For 1993, the total for all companies was 24.9 tcf; 23.5 for majors.

In the meantime, gas sold out of U.S. interstate pipelines has declined to 3.2 tcf for all companies, 2.8 tcf for majors, from 7.3 tcf for all companies in 1987, 6.3 tcf for majors (Fig. 2).

For common-carrier oil pipelines, moving both crude oil and petroleum products, total deliveries increased in 1993, driven by a sharp increase in product deliveries.

But actual traffic (1 bbl of oil or product moving 1 mile) declined, especially for crude oil. It is on such barrel-mile movement that companies depend for revenues which fell in 1993 along with incomes.

On the construction front, U.S. gas pipeline projects proposed to the FERC during the 12 months before July 1, 1994 (Tables 2 and 3), amounted to slightly more than 1,230 miles of new or replacement line pipe and nearly 145,000 hp of new or additional compression.

Much of these plans are for new projects to bring more gas into California and for expansion projects to move more gas into markets in Middle Atlantic and interior states.

Major gas-pipeline projects for burgeoning markets in Florida may be in trouble. Adverse court decisions and growing community concerns for the environment promise to slow or halt altogether permitting processes.

Natural gas continues, however, to be touted as a clean fuel. That quality, its currently forecast low prices, and its availability all make it desirable as a fuel for electric-power generation.

Indeed, at the recent AGA Annual Meeting, former FERC commissioner Charles Stalon said any new generation capacity in the U.S. would most likely be gas fired.

What companies estimate it will cost to construct a pipeline or compressor station is included in their certificate filings before the FERC; these figures provide the summary data found in Tables 2 and 3.

These tables cover a variety of locations, pipeline sizes, and compressor horsepower ratings. For 1993, no project was filed with the FERC for a pipeline or compressor station in federal waters.

For any period, not all proposed projects are approved; not all approved ones are eventually built.

WHAT WAS SPENT

Actual costs for a project which is approved and built must be filed with the FERC within 6 months after the pipeline's successful hydrostatic testing or the compressor's being placed in service.

Tables 4 and 5 show such actual costs for pipeline and compressor-station projects reported to the FERC during the 12 months ending June 30, 1994.

Some of these projects may have been proposed and even approved much earlier than the 1-year survey period.

Others may have been filed for, approved, and built less than 1 year before completion.

And in its initial filing, each pipeline project may have been reported in construction "spreads," or segments, which is how projects are broken out in Table 2.

Completed-projects' cost data, however, are usually reported to the FERC for an entire filing, separating only pipeline from compressor-station (or metering site) costs and lumping several diameters together.

Overall, actual pipeline-construction costs exceeded anticipated ones by nearly $59 million (I 7.8 %).

This was due to labor costs exceeding estimates by nearly $63 million. Right of way (R.O.W.), damages, and surveying annual costs exceeded estimates by nearly $10 million.

Costs for miscellaneous items came in less than estimated by more than $18 million.

Material costs were closer to initial estimates, exceeding them by $4.5 million, or nearly 5%.

Unit costs ($/mile) were more than 25% over estimates, exceeding them by nearly $190,000.

Table 5 shows that actual costs for installing compression exceeded estimates by more than $25.7 million, nearly 13%.

Labor costs accounted for much of the difference, exceeding estimates by nearly $19 million. Actual material costs were nearly $12 million greater than estimates.

But estimated costs for land exceeded what was actually spent by more than $944,000, and cost estimates for miscellaneous items were greater than actual costs by more than $4 million.

U.S. INTERSTATE NETWORK

Revenue, income, and mileage changes cited earlier are evident on the pipeline-company tables.

As stated, these data are based on annual reports of regulated interstate pipeline companies and provide a variety of detail on each company for 1993.

Included are pipeline mileage operated, crude oil and refined-products delivered, natural-gas sold or moved for other companies, investments and changes made in pipeline carrier property, and operating revenues and net incomes earned.

Beginning with 1987, the Journal began tracking volumes of gas transported for others by major interstate pipeline systems (OGJ, Nov. 28, 1988, p. 33).

These data have provided a method of keeping track of the changing U.S. gas-transmission industry.

PIPELINE MILEAGE

Comparisons between any years of U.S. petroleum and natural gas pipeline mileage must be made with care for two reasons:

• The number of companies required to file reports with the FERC varies each year.

• The FERC's system for classifying interstate natural-gas pipeline companies changed with the 1984 reporting year (OGJ, Nov. 25, 1985, p. 55).

Since 1984, FERC-regulated gas pipeline companies have been classified as "major" or "nonmajor" based on total natural-gas transmissions for each of the 3 immediately previous reporting years.

Definitions of these categories can be found at the end of the table "Gas pipelines" and in FERC Accounting and Reporting Requirements for Natural Gas Companies, para. 20.011.

One effect of this change has been that companies classified as nonmajor are exempt from filing certain data. Chief among the excluded figures are mileage and gas-sales or transportation figures.

Many nonmajor companies nonetheless file such data voluntarily but consistency exists only among major companies.

In comparisons, therefore, figures for nonmajor companies should be excluded from a calculation of total U.S. interstate pipeline utilization for any given year because of their unreliability year to year.

Therefore, combining 1993 mileage for all regulated liquids-pipeline companies (163,903 miles) with mileage reported by the major natural-gas pipeline companies (48 companies reporting 232,902 miles) yields a total figure of 396,805 miles operated for 1993.

This represents a slight increase (7,382 miles; 1.9%) over comparable mileage reported for 1992. Those former figures had shown a drop of 8% over data for 1991.

Whether the FERC designates a liquids pipeline company as an interstate common-carrier pipeline determines whether the company must file an FERC annual report (Form 6).

These reports for 1993 show that gathering mileage was essentially flat (+100; 0.35%); crude oil lines grew by only a fraction more (594 miles; 1.09%); and product mileage fell slightly (-1,184 miles; -1.46%) over mileage reported utilized in 1992.

These figures continue the erratic pattern of liquids-pipeline utilization for the past 10 years (Table 6).

Natural-gas transmission lines for all companies (major and those nonmajors which reported mileage) were down more than 57, compared with the same data for 1992.

DELIVERIES

Throughput for liquids-pipeline companies in 1993 increased compared with 1992.

For all natural-gas pipelines, sales of gas in 1993 fell by nearly 25%; for majors, by almost 7%.

As stated earlier, these figures for gas pipelines reflect the continuing shift of pipeline companies to transporters of gas for others from their historic role as buyers of gas for resale.

This shift has been evolving for 10 years (Fig. 2) and was evident in 1993 in the volumes of gas regulated interstate pipeline companies transported for others.

Last year, all regulated U.S. interstate gas pipelines carried more than 24.8 tcf of gas for others; of those volumes, majors carried almost 23.5 tcf.

For majors and nonmajors, volumes of gas transported for others rose slightly (I%) when compared to volumes carried in 1992; for majors, the rise was nearly 7%.

Gas moved for others in 1993 by major and nonmajor interstate gas pipeline companies (24-85 tcf) made up 88.6% of total volumes (28.0 tcf) that moved through the U.S. system, up from 85.3% for 1992, 82.9 % for 1991, and 78.6% for 1990.

For major companies (whose total volumes reached more than 26 tcf), the share was larger: more than 89%. This share also represented an increase over the figures for 1992 (nearly 88%), for 1991 (84%), and for 1990 (81 %).

Crude-oil and product deliveries last year exceeded 12.2 billion bbl, an increase over 1992 of nearly 76%.

This increase was pushed by a more than 12% increase in petroleum product deliveries (which made up 4517, of total deliveries).

Crude-oil deliveries (55% of total) increased by about 2.5%.

Truckline traffic for U.S. crude-oil and product pipelines, however, showed a decline in 1993 compared with 1992. This measure of system utilization-1 bbl moving 1 mile declined by more than 11%, entirely the result of a more than 25% drop in crude-oil traffic.

Product traffic increased by nearly 6% compared to 1992.

TOP 10 COMPANIES

Oil & Gas Journal ranks the top 10 oil-pipeline companies in three categories-mileage utilized, truckline traffic (bbl-mile), and operating income.

OGJ uses four categories-mileage, gas sales, gas transported for others, and operating net income-for natural-gas pipeline companies.

These rankings are broken out from the pipeline-company tables.

The term "gas plant" refers to the physical facilities-compressors, metering stations, and pipelines used to move natural gas.

For all natural-gas pipeline companies, net income as a portion of gas plant investment increased for the second N,ear in a row and the fifth time in 6 years.

Net income as a portion of gas plant investment stood at 3.6% for 1993, 3.1% for 1992, 0.5% for 1991, 5.2% for 1990, 4.6% for 1989, 3.1% for 1988, and 2.9% for 1987.

This indicator of industry return on investment stood at 8.7% in 1984, the year the FERC began (with Order 436) its restructuring of the interstate gas pipeline industry that culminated in 1992 with Order 636.

Beginning with 1985, net income as a portion of gas-plant investment fell until 1988 when began its gradual comeback.

For major gas pipelines in 1993, net income as a portion of gas-plant investment was 3.5%, up from 3.1% in 1992. Since it stood at 7.6% for 1984, the highest it has reached is 4.8% for 1989.

For 1993, all gas-pipeline companies reported an industry gas-plant investment totaling more than $55.6 billion compared with slightly less than $55.5 billion for 1992 and $54.6 billion for 1991.

Majors' gas-plant investment in 1993 was nearly $51,4 billion compared with $46.9 billion in 1992, $48.9 billion in 1991, and $47.9 billion for 1990.

For interstate common-carrier liquids pipeline companies in 1993, net income as a percentage of investment in carrier property fell to 5.5% from 7.6% in 1992, 6.67, in 1991, and 9% in both 1990 and 1989.

In 1987, net income as a percentage of investment in carrier property for oil pipelines was more than double 11.6% that for last year.

Actual investment in carrier property rose in 1993, by more than $4.5 billion (16.7%) after a fractional increase in 1992 and a rise of 4.3% in 1990.

Another measure of the profitability of oil and natural-gas pipeline companies in recent years is the percentage net income represents of operating income.

Through 1987, trends for liquids pipeline companies and for natural gas pipeline companies had been heading in opposite directions for 10 years.

For liquids-pipeline companies in 1993, income as a portion of operating revenues was 25.4%, down from 28.8% for 1992 and from 26.3% for 1991.

In 1989, this figure was 34.2%.

Income as a portion of revenues for major natural-gas companies was 9.5% in 1993; for all gas-pipeline companies, 9.1%.

TRACKED COMPANIES

In this annual report, Oil & Gas Journal has for several years been tracking investment by five crude-oil pipeline companies and five products pipeline companies.

Table 7 indicates that investment by the five crude-oil pipelines stood at $1.8 billion at the end of 1993 compared with $1.87 billion at the end of 1992, and $1.89 billion at the end of 1991.

Investment by the five product pipeline companies in 1993 was $3.2 billion compared with $3.1 billion for 1992 and $3.01- billion for 1991.

Fig. 3 illustrates the investment split in the crude oil and products pipeline companies.

CONSTRUCTION ACTIVITY

Fig. 3 shows that, in those pipeline companies' estimates of construction costs, line pipe and fittings and laying pipeline comprise nearly 72% of the cost of -a pipeline system.

In actuality, these two components made up more than 80% of the costs of natural-gas projects reported to the FERC in the 12 months prior to July 1.

Since the era of rapid escalation in the late 1970s and early 1980s, construction costs have risen only slightly until the last few years. Since 1990, construction labor costs have begun to take up a greater portion of the overall cost "pie."

COST TRENDS

Table 8 lists a 10-year,. land-construction cost trend for natural-gas pipelines with diameters ranging from 8 to 36 in. The table's data consist of estimated costs filed with the FERC, the same data that are shown in Tables 2 and 3.

The average cost per mile for any given diameter, Table 8 shows, may fluctuate from one year to another as projects' costs are affected by geographic location, terrain, population density, or other factors.

The cost-per-mile trends from 1993 to 1994 are mixed with generally higher costs per mile for labor and, to a lesser extent, for materials.

Yearly fluctuations in these figures are illustrated in construction figures for a 12-in. pipeline.

These had leapt between 1985 and 1986, fallen in 1988 by more than 301% jumped again in 1990 by 233%, fallen for 1991 by 68%, jumped again in 1992 by 17% dropped in 1993 by 12% but were up for 1994 by more than 12%.

SLOWING PACE

Table 2 lists 77 land-pipeline construction projects and no marine projects. This compares with 88 land and 1 marine project in the 1993 Pipeline Economics Report (Nov. 22, 1993, p. 43) and 131 land and no marine projects in the 1992 report,

For the 12 months before July 1, the 77 land projects proposed to the FERC amounted to more than 1,233 miles of pipeline at a total cost of more than $800 million.

In 1993, slightly less than 2,000 miles of land and marine pipeline carried an estimated price tag of almost $1.7 billion.

COST COMPONENTS

Cost-per-mile figures may reveal more about cost trends than aggregate costs.

For proposed U.S. gas-pipeline projects in the 1993-94 period surveyed, the average land cost was nearly $650,000/mile, compared with more than $860,000/mile for the 1992-93 period.

As stated, no marine projects were proposed to the FERC between July 1, 1993, and June 30, 1994.

Analyses of the four major categories of pipeline construction costs material, labor, R.O.W., and miscellaneous-can also indicate trends within each group.

Material costs include those for line pipe, pipe coating, and cathodic protection.

R.O.W. costs include surveying, obtaining right-of-way, and allowing for damages.

"Miscellaneous" costs generally cover engineering, supervision, contingencies, allowances for funds used during construction (afudc), administration and overheads, and FERC filing fees.

For the 77 projects surveyed for the 1993-94 period covered in this report, costs-per-mile for the four categories are as follows:

• Material-$169,925/mile a Labor-$296,218/mile

• R.O.W., damages, and surveying-$48,083/mile

• Miscellaneous-$135,725/mile.

Table 2 lists proposed pipelines in order of increasing size (OD) and increasing lengths within each size. The average cost per mile for the projects shows few clear-cut trends related to either length or geographic area.

In general, however, the cost per mile within a given diameter indicates that the longer the pipeline, the lower the incremental cost for construction. And broadly lines built nearer populated areas 'tend to have higher unit (per-mile) costs.

Additionally, road, highway, river, or channel crossings and marshy or rocky terrain each strongly affects pipeline construction costs.

Fig. 4, derived from Tables 2 and 4 for land pipelines, shows the major cost-component split for pipeline construction costs, both estimated and actual.

Material and labor are shown to make up more than 80% of the cost of constructing land pipelines.

Fig. 5 plots the average pipeline construction cost for land gas pipeline construction projects listed in Table 2.

Fig. 6 shows the cost split for land compressor stations based on data in Tables 3 and 5.

Copyright 1994 Oil & Gas Journal. All Rights Reserved.

Issue date: 11/21/94